What’s Ahead for the 10-Year Treasury Rate After the Fed Cuts

Lower 10-year yields would help reduce the cost of servicing the national debt. Above, the Treasury building in Washington, D.C.. (Ting Shen/Bloomberg)

Investors, and President Donald Trump, shouldn’t count on a widely anticipated rate cut by the Federal Reserve to reduce yields on 10-year Treasury debt, the biggest determinant of how much it costs to buy a home, fund a business, or pay the interest on the national debt.

While research by DataTrek found that the 10-year yield does tend to decline when the Fed cuts its policy rates, the picture is different if the economy isn’t in a recession when the cuts take place. That appears to be the case now: the economy is expanding and businesses are hiring.

In a research note published Thursday, DataTrek’s co-founder Nicholas Colas looked at the nine periods since 1989 when the Fed made a series of cuts to its policy rate. He found that in periods outside of a recession, the odds are nearly 50-50 for a rise, or a decline, in 10-year yields.

The average move was a decline of 10 basis points, 0.1 percentage point, or essentially zero. The 10-year yield declined when the Fed cut rates between April 1989 and February 1990; between July 1995 and January 1996; and in 2019, according to Colas’ research. It rose both in 1998 and last year, when the Fed lowered rates from September through December.

Created with Highcharts 9.0.110-year Treasury yields and Fed rate cuts.Source: Tullett PrebonNote: Bps stands for basis pointsAs of Dec. 30

Created with Highcharts 9.0.125 bps25 bps50 bpsJuly 2024Aug.Sept.Oct.Nov.Dec.3.43.63.84.04.24.44.64.8%

Although signs of economic weakness are emerging, the market now believes that there is no recession on the horizon. Prices of interest-rate futures indicate investors believe the Fed is almost guaranteed to lower its benchmark short-term rate next month, even after Tuesday’s hot reading for wholesale inflation.

Colas’s work indicates that given that background, the 10-year may not budge, and could go lower or higher if it does move. That isn’t good news for the people in Washington who have put political pressure on the Fed to lower its rates.

Rates cuts would directly lower yields on Treasury bills, reducing interest costs for the growing share of debt that expires in a few weeks to a year. But if 10-year yields don’t fall, the government wouldn’t garner the same benefit for longer-dated debt, which still accounts for some 70% of the outstanding Treasury debt. It cost the government $91.9 billion to service the U.S.’s debt in July.

On the positive side, the market may already be benefiting from expectations for lower rates. Work by Ned Davis Research suggests that 10-year rates typically decline ahead of a Fed rate cut that comes six months or more following the previous reduction. The most recent move lower was in December.

The median decline in the 10-year yield over the 63 trading days before such cuts is 31 basis points, according to NDR. The 10-year yield fell on Wednesday and is 0.121 percentage point lower this month. Lower yields also mean prices of existing Treasuries have risen, since yields and price move in opposite directions.

History isn’t a perfect predictor of the future, but it can offer clues.

Write to Karishma Vanjani at karishma.vanjani@dowjones.com.